Capital Gains Tax On Sale Of Inherited Property



What is Capital Gain Tax?


Capital Gains Tax or CGT is defined as the implication of tax over the realized profits of the sale of an asset, especially a non-inventory asset, such as property, bonds, stocks, or precious metals. The Capital Gains tax is payable on the excess amount realized at the time of sale of the asset as compared to its cost of acquisition. Therefore, in other words, capital gains tax is levied on the profits realized by an investor when he or she sells the capital asset.

Such capital gain taxes, therefore, only imply when:

  • The asset is purchased at a lower cost than the sale price of the asset.
  • The asset is sold at a higher price than the cost of acquisition of such assets.
  • The capital asset is sold.

The capital gain taxes would not imply while the investor holds the assets in his/her name or sells it at the same or lower price as compared to its cost of acquisition.


Under the Income Tax provisions of India, the Capital Gain Tax is further classified under the following two headings:

  • Short Term Capital Gain (STCG): This would imply when the investor sell the capital asset within three years of purchasing or acquiring such asset. Short term capital gains are added to the total income of the individual and taxed as per the income tax slab.
  • Long Term Capital Gain (LTCG): This would imply if the investor sells or realizes the asset after three years from the date of its acquisition. Long term capital gains are taxed after indexation of the asset. Indexation implies  the adjustment of the purchase price of the asset according to the rate of inflation. Thus, the indexation benefit ideally enhances the purchase value of the asset, thus lowering the profits realized due to the sale of such assets.


Tax Rules for Inherited Property in India


Many countries across the globe levy an Inheritance tax at the time of inheriting any asset from the ancestors. However, India does not levy such Inheritance tax on any asset inherited by any individual. Any asset inherited by way of inheritance or according to a will or in consideration of death of the payer is exempted from paying income taxes under Section 56 (ii) of the Income Tax Act.


Though there is no tax implication while inheriting a property in India, the individual is certainly subjected to pay capital gain taxes on the sale of such inherited property. Just like any other instance of calculation of capital gains tax, the individual selling an inherited property needs to pay capital gains tax on the profits accrued from the sale of such inherited property.


Capital Gain Tax on Sale of Property


Capital Gains Taxes accrue only on the sale of any inherited property. However, no specific taxes imply under the Income Tax Act of India, while any individual inherits the house or possesses the house.


In case such inherited asset or property is held for three years or more (thirty six moths or more), then such inherited asset is treated as a long term asset. Thus, at the time of realization of such asset, the normal long term capital gain tax would imply on the net profits realized from the sale of such assets after deducting the cost of acquisition, cost of improvement and applying the indexation factor for the year in which such sale was realized.


In case, the property or the asset, is held for a period of less than thirty six months, the amount of profit after deducting the cost of acquisition of such assets and cost of improvement, if any, on such asset, from the realizable sale value of such asset would be treated as a short term gain for the individual who inherited such assets and would be taxed as an income of the individual at the prescribed current taxation slabs proposed by the Government of India.


Such deduction of cost of improvement and enhanced value of cost of acquisition due to the effect of cost inflation multiplier for the year in which such sale is realized (indexation benefit) is only applicable for any property where the combined holding period (held by the purchaser and the inheritor) exceeds the period of thirty six months.


The inheritor further has two ways to save taxes on long term capital gains realized from the sale of inherited property or asset:

  • The inheritor can use the long term capital gain in investing in purchasing another house property within a year from the sale of such inherited property or construct a new house within a period of three years from the date of sale of such inherited property.
  • The inheritor can invest the long term capital gains amount in a NHAI or REC bond subjected to a maximum of INR 50 Lacs within six months of the accrual of such long term capital gain.

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